COVID-19 Panel: Reopening Update

Brian Belski, was joined once again by Dr. John Whyte, Chief Medical Officer, WebMD, along with BMO’s Michael Gregory and Jon Hill to provide commentary on how we’re managing through the pandemic from a health, markets and macroeconomic perspective as regions across Canada and the United States continue to reopen. 

Recession Recedes even as U.S. Infections Surge

With more than 10 million cases of COVID-19 worldwide, nearly double that of a month ago, Brian Belski, Chief Investment Strategist at BMO Capital Markets, on Monday moderated a video-conference, roundtable discussion with BMO experts to discuss the latest developments in the outbreak. Joining him on the call were Michael Gregory, Deputy Chief Economist at BMO Capital Markets and Jon Hill, vice-president, US Rates Strategy, BMO Capital Markets. Special guest Dr. John Whyte, Chief Medical Officer of WebMD, joined the webcast to discuss the most recent medical developments.                       

Mask Motivation

As the U.S. undergoes a massive surge in the number of reported infections, Dr. Whyte underscored the importance of masks and facial covering to prevent further spread of the coronavirus.

“The totality of the evidence shows that masks and facial covering work,” said Dr. Whyte, warning at the same time that nations and their populace should not wait for a vaccine to drive initial reopening. “So we need to be wearing those when we go out, we need to encourage others to wear them as well.”

As of Monday, the United States had 2.6 million cases of COVID-19 infection, with more than 128,000 deaths due to the virus. In fact, it recently reached its highest incidence of infections to date, at more than 40,000 new cases per day as some states started to reopen their economies. Because most of the new cases have been in young people, in the 18-35 age cohorts, the severity of cases has dropped, but Dr. Whyte warned that could easily lead to greater infections of elder relatives.

“We're seeing this increase primarily in 36 states, primarily in the south,” he said, warning that the true impact of the surge will not be known for another 10-14 days, once the incubation period is spent. “Even in Florida alone, there have been 10,000 cases in one day.”

In Canada, with 103,000 cases and more than 8,000 deaths, there has been a steady decline in infection rates over the past 50 days, Dr. Whyte said.

High Vigilance in U.S. Surge

Despite the surge, Dr. Whyte said another full economic lockdown was unlikely, even if there is a second wave of infection in the fall, because the system is far better prepared than it was when the outbreak took hold in March.

Instead, he said to expect hyper-vigilance from governments at various levels.

“What we're going to see is a much more surgical approach to spikes in the United States, meaning that they'll focus on the local area and the county and will start to pare back some of their reopening stages, but I don't see any situation where we're going to go back to total lockdown. I just don't think there is the appetite,” he said.

Treatments and Vaccines

While there are no FDA-approved treatments for the disease, considerable progress has been made amid decentralized trials and more regulatory flexibility.

“We have multiple drugs in development or multiple brands and multiple trials going on, and I expect by the end of summer, we'll have more data,” he said.

Similarly, there are a number of vaccines under development and Dr. Whyte forecast one could become commercially available by January 2021, slightly further out than initial forecasts for a vaccine to be ready by the fall.

As a next step in containing the virus, Dr. Whyte called for a deeper understanding of risk and where infection rates are occurring.

“We have to disassociate this idea of reopening to the presence of a vaccine. We need to really focus on developing a much deeper discussion of risk,” he said. “We need to look at data more locally. We have that ability, but we haven't spent enough time focusing on county by county area, province by province area, and we need to do that.”

Economic Outlook

Michael Gregory, Deputy Chief Economist at BMO Capital Markets, opened his comments on the webcast to state that the recession is over, making it the shortest on record. Unfortunately, it was also the deepest in the post-war period, for both Canada and the United States. That, Gregory said, “means it's the deepest, most severe recession since the Great Depression.”

The big question people are asking now, he said, is whether and when GDP and jobs regain the losses since COVID-19 plunged both economies into recession. The longest recorded GDP recovery after a recession was after the Great Recession, for both the United States and Canada, when the United States took eight quarters and Canada took six quarters to recover.

“So that becomes the benchmark,” Gregory said, “and then the question is, are we going to be slower or faster than that benchmark?”

Headwinds for recovery

Gregory noted that the large amount of fiscal and monetary policy stimulus put in place is providing a tailwind that will likely prevent the GDP recovery from exceeding the previous benchmark. That said, he mentioned a number of headwinds that will slow recovery down.

Absence of a vaccination or effective treatment – As long as these aren’t available, Gregory said, “We don't think that business and consumer confidence will fully recover.”

Many who are jobless won’t get their jobs back – Gregory explained that new operating constraints may prevent businesses from hiring former workers back, and some businesses may fold altogether.

Higher debt levels – Higher levels of private sector debt, Gregory said, mean higher debt payments moving forward and, “Unfortunately some of those higher debt burdens are going to result in increased insolvencies and bankruptcies as well.”

State and local fiscal consolidationt – In the United States, many state and local governments  have balanced budget requirements. Federal fiscal measures currently being debated are partly designed , Gregory said, “To prevent the kind of layoffs that are likely to resolve, as you get fiscal consolidation at that level of government.”

Slower global growth – “We can't really rely on exports that provide that extra support for activity that we've had in previous recoveries,” Gregory said. That, along with the global trade war, dampens the outlook for global trade.

One thing to keep in mind, citing from a recent economics report by his team, is that it was a fast elevator ride down, but will be a slow stair climb back up, with each step marking another headwind.

Different sectors, different recoveries

Gregory said that food services, accommodation, air travel, and arts and entertainment will all underperform significantly due to COVID-19. “All areas of the economy that are crowd dependent,” he said, “and therefore unlikely to fully recover, even when the whole economy is back and has fully recovered.” Oil and gas will be another area with slow recovery, due to global issues, Gregory added.

Sectors he expects to outperform and lead the recovery include healthcare and social assistance as well as technology and communications, retail food stores and the warehouse sector.

“The backlogs of medical procedures and medical activity that's going to happen, it's going to push that part of the economy to grow much faster than other parts,” Gregory said.

A second wave of COVID-19, if it occurs, will not likely cause another recession, he said, primarily because of the stimulus now in place and the medical capcity we’ve created (therefore less need for lockdowns).

Push and Pull

Jon Hill, Vice President of US Rates Strategy at BMO Capital Markets, began his portion of the webcast explaining the “push and pull” factor he sees happening with the U.S. rate environment.

“On the one hand, we are seeing improvements in the underlying data,” Hill said. “The worst of the recession is over. We are having months where multiple millions of people are hired back in the U.S. This is all good news,” he said.

On the other hand, he explained, what functions as a pull, or drag, on the economy is the accelerating number of COVID-19 cases, but also “underlying longer-term growth difficulties, hits to sentiment and shifts in the underlying economy.”

Low Interest Rates for a Long Time

Hill went on to say that, with the expectation that this recovery will be measured in years, not quarters, the U.S. Federal Reserve has lowered its interest rates as low as it thinks it can, without being counterproductive, for the foreseeable future.

“They literally used the phrase they're not even thinking about thinking about raising interest rates at one point in the future,” Hill said.

He explained that the Fed is essentially suppressing interest rates which may be bad for some savers, but this makes it cheaper to borrow money, facilitate credit creation and get the economy back on track. “By doing this, they are giving fiscal space for the U.S. government to fund all these huge deficits,” he said.

Hill said the reality is that we are in a lower for longer environment. That means rates will stay low, “and we're going to continue to see these push and pull factors where some things are pointing towards higher interest rates and a faster economy.” He went on, “Other things are leading to reasons for caution.This is just the nature of the dynamic position we’re in, currently.”

Growth and Value Investing

Since the COVID-19 outbreak drove stock markets down to their March 23 low, stocks have rocketed back up, spurring questions from BMO clients about why they fell so fast and recovered so quickly.

In a world where many investors have been caught up in the psychological impact of the disease and subsequent lockdowns, BMO Capital Markets’ Chief Investment Strategist Brian Belski urged investors to resist the urge to invest based on emotion, and instead to focus on fundamentals and value.

In maintaining that balance, he cautioned also against overall reliance on macro investing at the expense of looking at stocks and investments from the long-term viewpoint.

“I think it's excessively important for investors right now to do a couple things, number one is to rely on fundamental analysis and themes,” he said. “We don't want you to be a growth or a value investor; we want you to be both. We want you to own core portfolios and build those core portfolios with high branded names in both America and Canada. We also want you to focus on things like company management and cash flow and earnings and valuation.”

Belski said his team remains bullish on the market recovery in the U.S. and Canada, which he said are home to some of the world’s best companies and the ones most likely to drive markets as the world emerges from COVID quarantine.

“That's why we stayed so bullish. We still see the U.S. market hitting 3400 by the end of the first quarter of 2021, and the TSX hitting 18,200,” he said, adding that his team is overweight in U.S. communication services technology as a driver of an increasingly mobile society. He also sees growth opportunities in select areas within consumer discretionary warehousing. On the longer-term investment side, in Canada and the United States, Belski said his team also likes the financial and energy sectors.